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Problem 2 Business Income Reconciliation and CCA (55 points available) The controller of Martinez Power Tool Corporation Ltd. (MPT Corp., a public corporation) has reached out to you, requesting that you calculate the minimum Income from Business for Tax purposes of the company for the year ended December 31, 2021 under the provisions of the Income Tax Act. Below is the information: The corporation has carried on business in Canada since its incorporation under the Canada Business Corporations Act in 1974. Its net income for the year ended December 31, 2021, as determined under generally accepted accounting principles, is as follows: Martinez Power Tool Corporation Limited INCOME STATEMENT For the Year ended December 31, 2021 .$8,500,000 Sales Cost of goods sold: Inventory, January 1, 2021 Purchases 800,000 .7,000,000 $7,800,000 600,000 Inventory, December 31, 2021 Cost of goods sold Gross profit Selling expenses General and administrative expenses.. (7.200,000) ..$1,300,000 ..$ 500,000 .200.000 Other income (700,000) $ 600,000 60,000 $ 660,000 .(300,000) $360,000 Provision for income taxes Net income Included in this summary of the financial results of Martinez Power Tool Corporation Ltd. are the following details: 1. Closing inventory was written down to record a reserve of $40,000 for inventory obsolescence due to the impairment of fair market value below cost in the current year. 2. Sales amount has included an allowance for doubtful accounts for $52,000, which is calculated as 25% of the account receivables that have been outstanding more than 120 days. 3. MPT has written off bad debts of $ 10,000 during the year and received $2,000 payments for bad debts written off in the previous year. 4. Selling expenses include: (1) Expenses to attend three conventions, each costed $10,500 (2) Membership fees of golf club for meeting the clients and negotiating the business contracts $5,000 (3) Utilities service connection for the hydro meter in a new store $1,000 (4) Charitable donations to local soccer team to improve the Company brand $5,000 (5) Bonus $20,000 declared but unpaid to the sales manager, but the bonus will be paid by May 15th of the following year when the company file the current year's tax return. 5. General and administrative expenses include: (1) Company has organized a summer picnic and invited all the employees $25,000 (2) Depreciation expenses for all the fixed assets $29,000 (3) Legal fees related to insurance of shares and loans $10,000 (4) Legal fees to defend a lawsuit brought up by a customer $5,000 (5) MPT Corp. contributed for certain employees to the company's registered pension plan. The pension plan is a defined contribution (money purchase) plan. The company matches the employees' contributions on dollar-to-dollar basis. President Vice-President Account accountant Registered Pension Plan $17,000 12,500 4,800 Employment Compensation $180,000 125,000 70,000 5,000 6. Other income includes: (1) Capital gain on disposal of a van (the old van mentioned in item 7 below): (Proceeds: $22,000; net book value: $17,000) (2) Capital gain on disposal of office equipment (mentioned in item 8 below): (Proceeds: $28,200; net book value: $ 25,200) (3) Interest income 3,000 ..3,000 7. MPT Corp. purchased a new van in the year to replace an old van. The new van costs $58,000, and the company solely uses it for business activities. The old van was sold in the year for $22,000, which costed $43,000 in earlier of 2018 when it was purchased. UCC balance of the old van at the beginning of 2021 is $17,900. 8. MPT Corp. has an UCC balance for office equipment of $ 23,000 in the beginning of 2021. During 2021, MPT Corp. sold some office equipment for $ 28,200, which originally costed $ 50,000 at purchase. 9. A $80,000 leasehold improvement has been made in January 2020 to renovate a building. This is a five-year lease with two three-year renewal options. Since 2021, an improvement has been made for landscaping of the building at a cost of $6,000. 10. In 2021, the corporation purchased goodwill for $36,000 and a limited-life (5 years) licence for $20,000. The corporation had not purchased any intangible assets prior to 2021. Required: You are required to calculate the minimum Income from Business for Tax purposes of the company for the year ended December 31, 2021 under the provisions of the Income Tax Act. Assuming HST is 13% wherever needed. You need to indicate, briefly, the reasons for making any necessary adjustments to financial accounting profits (also provide an ITA reference for each adjustment). You also need to indicate reasons for not considering an item in the computation, so that all items are accounted for in our work. You are required to show the calculation details and explanations of: each CCA (capital cost allowance) item included in the reconciliation. Any other item included in the reconciliation table, where calculation/explanation is needed. . Problem 2 Business Income Reconciliation and CCA (55 points available) The controller of Martinez Power Tool Corporation Ltd. (MPT Corp., a public corporation) has reached out to you, requesting that you calculate the minimum Income from Business for Tax purposes of the company for the year ended December 31, 2021 under the provisions of the Income Tax Act. Below is the information: The corporation has carried on business in Canada since its incorporation under the Canada Business Corporations Act in 1974. Its net income for the year ended December 31, 2021, as determined under generally accepted accounting principles, is as follows: Martinez Power Tool Corporation Limited INCOME STATEMENT For the Year ended December 31, 2021 .$8,500,000 Sales Cost of goods sold: Inventory, January 1, 2021 Purchases 800,000 .7,000,000 $7,800,000 600,000 Inventory, December 31, 2021 Cost of goods sold Gross profit Selling expenses General and administrative expenses.. (7.200,000) ..$1,300,000 ..$ 500,000 .200.000 Other income (700,000) $ 600,000 60,000 $ 660,000 .(300,000) $360,000 Provision for income taxes Net income Included in this summary of the financial results of Martinez Power Tool Corporation Ltd. are the following details: 1. Closing inventory was written down to record a reserve of $40,000 for inventory obsolescence due to the impairment of fair market value below cost in the current year. 2. Sales amount has included an allowance for doubtful accounts for $52,000, which is calculated as 25% of the account receivables that have been outstanding more than 120 days. 3. MPT has written off bad debts of $ 10,000 during the year and received $2,000 payments for bad debts written off in the previous year. 4. Selling expenses include: (1) Expenses to attend three conventions, each costed $10,500 (2) Membership fees of golf club for meeting the clients and negotiating the business contracts $5,000 (3) Utilities service connection for the hydro meter in a new store $1,000 (4) Charitable donations to local soccer team to improve the Company brand $5,000 (5) Bonus $20,000 declared but unpaid to the sales manager, but the bonus will be paid by May 15th of the following year when the company file the current year's tax return. 5. General and administrative expenses include: (1) Company has organized a summer picnic and invited all the employees $25,000 (2) Depreciation expenses for all the fixed assets $29,000 (3) Legal fees related to insurance of shares and loans $10,000 (4) Legal fees to defend a lawsuit brought up by a customer $5,000 (5) MPT Corp. contributed for certain employees to the company's registered pension plan. The pension plan is a defined contribution (money purchase) plan. The company matches the employees' contributions on dollar-to-dollar basis. President Vice-President Account accountant Registered Pension Plan $17,000 12,500 4,800 Employment Compensation $180,000 125,000 70,000 5,000 6. Other income includes: (1) Capital gain on disposal of a van (the old van mentioned in item 7 below): (Proceeds: $22,000; net book value: $17,000) (2) Capital gain on disposal of office equipment (mentioned in item 8 below): (Proceeds: $28,200; net book value: $ 25,200) (3) Interest income 3,000 ..3,000 7. MPT Corp. purchased a new van in the year to replace an old van. The new van costs $58,000, and the company solely uses it for business activities. The old van was sold in the year for $22,000, which costed $43,000 in earlier of 2018 when it was purchased. UCC balance of the old van at the beginning of 2021 is $17,900. 8. MPT Corp. has an UCC balance for office equipment of $ 23,000 in the beginning of 2021. During 2021, MPT Corp. sold some office equipment for $ 28,200, which originally costed $ 50,000 at purchase. 9. A $80,000 leasehold improvement has been made in January 2020 to renovate a building. This is a five-year lease with two three-year renewal options. Since 2021, an improvement has been made for landscaping of the building at a cost of $6,000. 10. In 2021, the corporation purchased goodwill for $36,000 and a limited-life (5 years) licence for $20,000. The corporation had not purchased any intangible assets prior to 2021. Required: You are required to calculate the minimum Income from Business for Tax purposes of the company for the year ended December 31, 2021 under the provisions of the Income Tax Act. Assuming HST is 13% wherever needed. You need to indicate, briefly, the reasons for making any necessary adjustments to financial accounting profits (also provide an ITA reference for each adjustment). You also need to indicate reasons for not considering an item in the computation, so that all items are accounted for in our work. You are required to show the calculation details and explanations of: each CCA (capital cost allowance) item included in the reconciliation. Any other item included in the reconciliation table, where calculation/explanation is needed